State delays funding to schools, so districts take out interest-loans

When state administrators boasted last summer about Arizona's balanced budget and its first "rainy day" fund contribution since 2009, they didn't mention that delayed state payments were forcing many school districts to borrow money to pay teachers' salaries.

The amount owed to schools in one fiscal year - but not set for delivery until the next one - is estimated at roughly $950 million for the next fiscal year. That dwarfs the $450 million the state set aside for emergencies.

The delayed payments, called rollovers because funds are disbursed the following fiscal year, began in fiscal year 2008 and are expected to continue.

School districts now receive about two-thirds of their state payments during the school year, with the remaining third arriving in the summer, after the next fiscal year has begun. To cover costs in the meantime, districts often have to borrow from the county investment pool - and pay it back, with interest.

That has contributed to higher property tax rates for homeowners in many area school districts. School districts have raised tax rates to cover the cost of borrowing as well as to compensate for declining home values, changes in the state's funding formula and a 2009 skipped or reduced state payments, the effects of which continue to reverberate.

Pima County school districts absorbed a combined $43.5 million loss in 2009, when the state changed the rollover formula to take into account cash on hand. Districts were, in effect, penalized for having cash left at the end of the year.

But because cash on hand is part of the computation for determining local tax rates, there was new pressure to raise rates, and superintendents were in the unfortunate position of having to explain what happened.

"So it was a perfect (ugly) storm for us locally," Catalina Foothills Unified School District Superintendent Mary Kamerzell wrote in an email.

Though property tax rates have increased in the district, Catalina Foothills says it has so far been able to get by without borrowing. In the years after the rollovers first began, the district was able to cover the delayed payments with cash in its maintenance and operations budget. It's now relying on unrestricted capital funds to temporarily cover shortfalls, Kamerzell wrote.

The amount the state owes the district for this school year but won't pay until the next one is $2.8 million.

Charter schools, which don't have taxing authority, have been exempted from the delay practice. But growing school districts have been especially affected.

Vail Unified School District, for example, had to pay more than $17,000 in interest last fiscal year, said Ricky Hernández, the chief financial officer of the Office of the Pima County School Superintendent.

"They can - only to a degree - control cash flow," Hernández said.

In flush times, school districts can make a little extra cash by investing the money they have on hand and earning interest on it. But the interest many districts are paying to the county treasurer to borrow often is outpacing earnings.

It could be worse. Instead of having school districts rely on lines of credit, as they used to do, and pay 3.25 percent interest, Treasurer Beth Ford is lending money to school districts at an interest rate of eight-tenths of a percent.

That contrasts with Yuma County, where districts have been paying more than 5 percent interest, news reports show.

The local district most affected by state funding changes is the Joint Technical Education District, or JTED, which provides vocational training in partnership with local school districts and at a central campus.

It no longer receives money for freshman programs, and its other funding was capped at 91 percent of what is owed according to the state's formulas.

That's on top of the delayed payments and a $1.4 million underpayment in fiscal year 2009.

JTED is also an exception because it has no ability to change its tax rate, so collections have mirrored the decline in home value assessments.